Feeling a sense of déjà-vu about the current takeover frenzy? It's different this time—but only up to a point

LAST year, as global merger activity breached the giddy levels of the dotcom era, markets partied like it was 1999. The bankers and lawyers who work on deals braced themselves for hangovers. But instead, glasses were refilled, the music cranked up and the guests were invited to dance through the night. Some $2 trillion of deals have been unveiled so far this year, putting it on track to smash the record set in 2006 by a whopping 60% or more. That would exceed even the rosiest predictions on Wall Street.

This week saw yet another surge in animal spirits. As the battle for control of ABN AMRO, a Dutch bank, took new twists, Alcoa, an American aluminium giant, launched a hostile bid for Alcan, a Canadian rival. In the wake of Rupert Murdoch's $5 billion unsolicited bid for Dow Jones, Thomson firmed up an £8.8 billion ($17.5 billion) offer for Reuters, a competitor in the newswire and financial-information business. And rumours swirled of a possible acquisition of Rio Tinto by BHP Billiton, its larger competitor, to create the world's biggest mining company.

Such bold forays have been encouraged by soaring stockmarkets. The Dow industrials has lately hit new highs with unusual frequency. China's markets have surged on record trading volumes, despite efforts by officials to talk them down. Forget the turmoil of late February: the markets' strength is encouraging more deals. So euphoric is the mood that even acquirers, usually penalised on the expectation that they will overpay, are seeing their share prices jump: Alcoa's rose by 8% on the day of its bid. To cap it all, Warren Buffett, not normally one to follow the crowd, says he would spend as much as $60 billion on the right deal—far more than the investor has ever forked out on a single acquisition.

This has inevitably led to comparisons with the 1990s merger boom. But there are several big differences. The most obvious is that the 1990s were fuelled by stock, whereas today's frenzy runs on credit. With interest rates low, it has become easier for companies to finance themselves with debt than with equity. Cash is the main coinage (see chart).

from another pieceStockmarkets are today buoyed by a belief that LBO-bidders will swoop if share prices fall. It is known in the markets as the “private-equity put”, an echo of the “Greenspan put” in the late 1990s, when investors believed the Federal Reserve would always step in to save markets by cutting interest rates

This trend has played into the hands of the big private-equity firms, which now lead a fifth of all takeovers, measured by value. They still have giant war chests to empty—the biggest funds are touching $20 billion in size—and are spending at a record pace. With such resources to hand, they are becoming bolder (some would say less discriminating). The average buy-out has tripled in size since 2005, to $1.3 billion. And taboos are being broken, as evidenced by the recent takeover of a utility and a bank, two industries previously considered immune to private equity.

Another difference is that this boom is broader-based than the last, both in terms of industry and geography. No single industry is far ahead of the rest, as telecoms and the internet were last time. Excitement surrounds financial services, metals and mining, power generation, property and consumer goods. And whereas the deals in the 1990s were concentrated in America, this time they are more evenly spread. In April twice as much was spent in Europe as in the United States.

Moreover, today's merger wave is driven not by enthusiasm for a nebulous “new paradigm”, but by global trends, such as demand for commodities, the globalisation of capital markets and the rise of budding multinationals in developing countries. Companies are using cheap funding as an opportunity to expand into new markets—hence the rise in the share of mergers that are cross-border, to a record 46% in the four months to April.

Reassuringly unfriendlyToday is more like the 1980s than the 1990s in another way, too: the hostility of the buyers. The dotcom era was nauseatingly cosy, with only 4% of deals struck in 2000 deemed hostile or unsolicited. This year the level is hovering close to 20%. ....

But the danger of overpaying clearly increases as competition for transactions heats up and stockmarkets scale new heights. There are signs that this is happening: the average premium being paid, when measured as a percentage of the target's cash flow, is higher that at any time since the bursting of the last bubble.

>ready for the hangover..../ der nächste kater kommt bestimmt........

Moreover, there are fears that mergers will be used to paper over cracks. Profit growth for companies in the S&P 500 will fall to 7% this year after several years of double-digit expansion, reckons Thomson Financial. Firms may join forces to hide their own deteriorating performance.

That should worry shareholders. For those who advise on deals, however, the bigger concern is what might bring the party to an abrupt end. A sharp economic slowdown in America? The collapse of a giant buy-out? A credit crunch with no clear trigger?

In private, most bankers say it cannot go on for much longer. In public, they will just keep clinking their glasses.

2 Comments:

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